Given the growing talks about an AI bubble and rising concerns about tech debt, how exposed exactly are Canadian households should a bubble burst and how resilient is their balance sheet?
Statistics Canada estimates:
At the end of the second quarter, 71.6% of all foreign securities held by Canadian investors were in the form of US instruments.
Canadian investors added C$12.5 billion of foreign shares to their portfolios in September, C$10.5 billion of which (84%) were U.S. shares. This is the fifth consecutive month of U.S. share acquisitions. Since the beginning of the year, Canadian investors have acquired U.S. stocks seven out of nine months. Investment in U.S. shares totaled C$29.0 billion in the third quarter.
Overall, Canadian holdings of foreign securities reached a market value of C$4.2 trillion at the end of Q2 2025, of which C$3.2 trillion in foreign shares and C$1.0 trillion in foreign debt securities.
How is Canadian household wealth allocated?
As of Q2 2025, Canadian households held about $11.2 trillion in total financial assets in the second quarter of 2025, a 2.7% increase from the previous quarter “as equity markets proved to be resilient in the face of trade policy uncertainty and increased volatility,” according to Statistics Canada. The S&P 500 rose 10.6% in the second quarter and the S&P/TSX 7.8%, while the value of residential real estate fell C$3.3 billion.
Overall, financial assets represented nearly 63% of net worth in Q2 2025 and over 53% of total assets of C$21.0 trillion.
Households acquired a net C$28.5 billion in mutual fund shares and Statistics Canada also reported:
Households added $10.7 billion in Canadian currency and deposits in the second quarter, the slowest build-up since the first quarter of 2021.
On the liability side – mainly mortgage and non-mortgage debt – the increase was 1.5% or C$46.7 billion.
AI bubble warnings
With such an exposure to U.S. markets, are Canadians and the Canadian economy able to withstand a sharp correction?
The pace of AI mega-investments in relation to AI revenues is fuelling concerns of a potential bubble. Morningstar estimates that big tech firms are planning to invest US$5.2 trillion over five years:
While markets have rewarded this spending so far, historical analysis reveals a concerning pattern: Infrastructure booms typically result in overinvestment, excess competition, and poor stock returns.
Even Bank of Canada Governor Tiff Macklem weighed in on the astronomical amounts of AI investments, stressing that “if there were a shift in sentiment about the payoff of that, you could see a sharp revaluation downwards.”
Since then, NVIDIA has published outstanding results. But even these were not enough to assuage markets as the company’s stock came back down after rising on magnificent earnings.
In fact, Business Insider reported that CEO Jensen Huang said in an all-hands meeting that NVDIA was in a no-win situation:
If we delivered a bad quarter, it is evidence there’s an AI bubble. If we delivered a great quarter, we are fueling the AI bubble.
These warnings are happening against the backdrop of weak Canadian growth: the Bank of Canada projects an average 0.75 percent domestic GDP growth in second half of this year and its own Business Outlook Survey shows that 33 per cent of firms are planning for a recession, up from 28 per cent in the second quarter. The unemployment rate is currently close to 7%.
Risks from bond markets
But stock markets are not the only source of risk. This commentary from fund group Vontobel is a reminder that risk doesn’t only lie in stock markets:
Vontobel does expect more corporate defaults in months to come, “though we expect they will remain isolated cases given fundamentals across the market still look healthy,” the commentary said.
Vontobel is reacting to earlier comments from JP Morgan Chase CEO Jamie Dimon:
When you see one cockroach, there’s probably more. Everyone should be forewarned on this one.
Dimon was referring to the bankruptcy of subprime auto lender Tricolor Holdings, implying a potential for contagion to the credit market.
Bank of Canada’s insights
Research papers from the Bank of Canada show that the role of hedge funds in auctions is a source of vulnerability.
Another BOC staff paper analyzing trends across demographic groups by combining data from both the Ipsos Canadian Financial Monitor (CFM) and the Survey of Financial Security (SFS), also finds that:
Nearly two thirds of household wealth is held in marketable securities—including stocks, bonds, exchange-traded funds (ETFs) and mutual funds—that are at risk of repricing.
Here is another important finding:
About 77% of households with a mortgage could cover their full payments for at least 12 months using all their financial assets and roughly 64% could do so using only liquid assets.
Liquid assets include bond and mutual funds held outside of inaccessible accounts or accounts with complex, heavy withdrawal penalties.
Another Bank of Canada staff research paper notes that “MMFs’ growing presence in the Government of Canada (GoC) treasury bill and commercial paper markets suggests that liquidity in these short-term funding markets could be vulnerable to the trading activity of MMFs, particularly in scenarios where MMFs may sell these assets to meet investor withdrawals.”
For now, the central bank notes MMF vulnerabilities don’t “raise significant financial stability concerns” in Canada due to their relatively small size: 3% of the Canadian mutual fund sector. Yet they hold 5% of GoC treasury bills and 11% of non-government short-term paper. “The relatively large presence of MMFs in these markets suggests that MMFs could have a significant impact on liquidity conditions,” the paper said.
But Canada has one advantage: a larger share of retail investors compared to other countries where institutional investors play a bigger role. This could have explained the relative stability of Canadian MMFs compared with other countries during the March 2020 market turbulence.
Since institutional investors “may liquidate their MMF positions relatively quickly because of a sudden need for cash,” having investors with a “more stable behaviour” could bring some stability.
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